On Tuesday, the U.S. Department of Labor (“DOL”) unveiled its highly anticipated proposed changes to the overtime pay regulations of the Fair Labor Standards Act (“FLSA”). These proposed changes are predicted to broaden coverage to nearly five million additional workers. The proposal would more than double (to over $50,000 per year) the salary an employee must be paid to qualify for the “white collar” exemptions and increase the salary threshold for highly compensated employees to over $122,000 per year. The DOL passed on an opportunity to detail any revisions to the complex “duties test” for applying the white collar exemptions, opting instead to invite further comment from stakeholders as to whether any modifications to the test are needed.

The FLSA provides a number of exemptions from the Act’s minimum wage and overtime pay provisions, including exemptions for bona fide executive, administrative and professional employees. To qualify for one of these white collar exemptions, the employee must be paid a predetermined minimum salary and the employee’s job must primarily involve executive, administrative or professional duties. Under current regulations, an employee must be paid at least $455 per week ($23,660 per year) to meet the standard exemption. This figure has not been updated since 2004, and is now slightly below the 2014 poverty threshold for a family of four. In order to meet the corresponding exemption for highly compensated employees, such an employee must earn at least $100,000 in total annual compensation and meet a less onerous duties test.

The DOL’s proposed rule would increase the salary threshold for the standard white collar exemptions to the 40th percentile of weekly wages for all full-time salaried employees, or approximately $970 per week ($50,440 per year). The proposal would also increase the salary threshold for highly compensated employees to the annualized value of the 90th percentile of weekly wages of all full-time salaried employees ($122,148 per year). The proposal also includes a mechanism to increase these salary levels to ensure they remain current. The DOL’s explicit goal is to reduce the number of workers for whom employers must apply the “duties test” to determine exempt status and make it easier for employers to conclude that more employees are not subject to the exemption.

In calculating salary under the standard exemption, the DOL has historically instructed employers to count only actual salary and fee payments, excluding bonus payments of any kind. Although this rule is not explicitly changed in the proposal, the proposed regulations indicate the DOL now is considering whether to include nondiscretionary bonuses and incentive payments toward satisfying the salary test.  The DOL is not, however, considering discretionary bonuses, or considering any change to the exclusion of board, lodging, or payments for medical, disability, life insurance or contributions to retirement plans from the calculation.

Despite widespread speculation, the proposed regulations do not modify the standard “duties test” for the white collar exemptions. Instead, the DOL invited comments from stakeholders on: (1) whether employees should be required to spend a minimum amount of time performing work that is their primary duty in order to qualify for the exemption; (2) whether the Department should adopt a California state law requiring that 50 percent of an employee’s time be spent exclusively on work that is the employee’s primary duty to qualify for the exemption; and (3) whether the concurrent duties regulation for executive employees should be modified to avoid sweeping nonexempt employees into the exemption. The DOL’s pointed request for comments suggests a desire by the Department to make further revisions to the duties test in the final rule.

The proposed regulations have been made available on the DOL’s website but have not yet been published in the Federal Register. Upon publication, interested parties will have 60 days to provide comments regarding the proposed rule. Several months thereafter, the DOL will issue the final rule, with an effective date to occur several months after the final rule’s promulgation. While it is hard to predict the actual effective date for the final rule, we estimate the changes will go into effect by mid-2016.

Although these proposed regulations are not final and, consequently, are subject to change, employers can start to evaluate how the proposed change to the salary threshold will affect their workplace. For example, employers can immediately review current salaries to determine how many exempt employees would fall under the proposed salary threshold and therefore no longer qualify for exemption. Because these changes could have a substantial effect on overhead costs, budgets, and the overall bottom line, employers can begin to estimate the potential increase in overtime pay or increased salary to meet the new test. Employers also should keep the proposed salary threshold in mind when deciding how much to pay new hires, as well as how to structure any salary increases and incentive compensation in the interim.